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The Power Years

The Aftermath of the Storm

Texans gained the reputation for being oil millionaires

In the aftermath of the crisis in East Texas, the image of a struggling, impotent Railroad Commission began to be replaced by something quite different. While many factors influenced the price and availability of crude oil, the most politically visible players were the Interstate Oil Compact and the Texas Railroad Commission. The Railroad Commission did play an important role, but its visibility gave the agency, and Texas producers, an importance in the public mind that was out of proportion to their actual influence on oil and national affairs.

The Duties of the Railroad Commission

The Railroad Commission’s power, both real and perceived, stemmed from its four main duties in the regulation of petroleum production in Texas. These were:

Conservation. Unsound drilling practices had ruined fields and left millions of barrels of oil trapped underground. The commission set production limits and required sound practices to prevent further damage. The commission also was responsible for enforcing oil field safety and for preventing the contamination of ground water.

Prorationing. In the most controversial of its duties, the commission kept production well below market demand. Prorationing allowed the industry to develop and mature in an orderly manner, but also kept prices considerably higher than they would have been in a free market.

Protection of correlative rights. Oil and gas are invisible assets that flow across multiple property lines. The commission acted as a referee in disputes among property owners, tried to ensure equal access to the market for all producers regardless of size, and tried to allocate production quotas and well spacing fairly among producers whose tracts varied considerably in potential.

Regulation of natural gas.

Ernest O. Thompson

Ernest O. Thompson, 1937

Much of the credit for the myth of an all-powerful Railroad Commission goes to Commissioner Ernest O. Thompson. Thompson understood that the Railroad Commission was a political entity and that, as such, it needed to build public support for its services. At every opportunity, Thompson tirelessly promoted Texas oil and the idea that regulation would only enhance the free-market individualism and economic progress that most Texans supported.

During the East Texas crisis, Thompson, a former mayor of Amarillo, had come to dominate the commission. Thompson presided over the creation of an agency that was unrecognizable from the one he had joined in the early 1930s. In 1930, the Railroad Commission employed 69 people. By 1939, it had 566 employees working in multiple divisions. Not only the quantity of staff had increased. Thompson and his managers also focused on improving the quality, especially in the hiring of new graduates from the state’s geology and petroleum engineering schools. Eventually, Thompson knew, most of these young people would move on to higher-paying jobs in the private sector, but no matter—they would take support for the Railroad Commission and its mission with them.

Thompson and Commissioner Bill Murray with Boys' State participants, 1947

During the crisis, Thompson built support from both the majors and conservationists with his advocacy of prorationing. To win over the small producers, Thompson and the other commissioners now saw to it that there were plenty of exceptions to prorationing rules, particularly those governing well spacing and allowables per well regardless of potential.

This was a successful strategy for winning support for the agency and its goals, but it came at a price. Favoring small producers was economically wasteful, as it led the commission to approve the drilling of thousands of wells that were marginal producers. The extra investment spurred exploration, but it also contributed to higher costs. These costs were passed on to the consumer in the short run. In the long run, these costs would hurt the ability of Texas oil to compete with foreign imports. In the 1930s, several vast pools of oil had been discovered in the deserts of Arabia. The ramifications of these discoveries would be felt in the decades to come.

At first, Thompson hoped to parlay his success at the Railroad Commission into higher office. He ran for governor twice, in 1938 and 1940, but was defeated both times by W. Lee “Pappy” O’Daniel, a singing radio flour salesman. In the end, Thompson would make his career at the Railroad Commission, leading the agency until his retirement in 1965.